5 Key Indicators for Landing Top Profits

5 Key Indicators for Landing Top Profits

At Next Options, we make stock and options recommendations based on what the charts are telling us — not the talking heads and suit-and-ties on financial TV networks. We spend tons of hours every week analyzing stock charts, support and resistance levels, moving averages and numerous other technical indicators of the major indices to ensure that we’re bringing you recommendations that are set up for success.

Today, we’d like to share with you the top 5 key technical indicators we use every day when we’re trying to determine which trades are best for our Next Options subscribers. We talk about these indicators in our Daily updates and we wanted to give you our insight into the ways that you can use each of them to become a more successful, disciplined trader.

 

1. Volume

Volume is one of the most basic, yet most important, technical indicators that traders have at their disposal when analyzing different stocks. Volume bars are included at the bottom of almost every stock chart out there, and certainly all of the charts we include in our Daily Updates, but this technical indicator is often unwittingly disregarded by many new traders.

Volume is simply the number of stock shares or options contracts traded during a given period of time. Volume is extremely important, as it helps determine a stock’s momentum. On charts, you can see the volume indicator by going to the settings. Each vertical bar represents one day’s trading volume.

The taller the volume bar, the greater the number of shares traded that day. Volume can also be useful when determining whether a stock is getting ready to breakout or breakdown.

If a stock is increasing in price while volume remains low, it could mean that the move is unsustainable, as there will not be enough buyers to support the stock at a higher price. On the other hand, if a stock is decreasing in price while volume remains low, it could mean that buyers are simply absent from that stock on a given day, and the stock might not actually deserve to be declining.

However, if you see above-average volume on a stock that is either gaining or declining, this could be confirmation that the breakout or breakdown process is beginning, as it shows strong demand from large institutional traders.

When it comes to buying options, we always make sure there is plenty of open interest. Open interest is basically the same as a stock’s average daily volume. This is a measurement of options contracts changing hands between buyers and sellers.

When an option has low open interest, it can be harder to get the trade executed at the price you want, so we look for high volume as an indicator of strong liquidity, and you should, too. When there’s a lot of volume and/or open interest, you’ll know you aren’t the only one buying in and, when you want to close the trade, you’ll have someone to whom you can sell your securities.

 

2. Support and Resistance

Support and resistance are two different levels on a chart that indicate where a stock’s share price might experience an inflection point. The easiest way to think about support is as a “floor” for a stock's price, while resistance can act like a “ceiling.”

If a stock continually bounces off of a clearly defined price level when falling from prior highs, that level is called “support.” It is a temporary floor for the stock. The more times the stock touches this area and fails to continue down through this level, the stronger this support level becomes.

Once a stock’s price starts to rise, it will often climb back to the prior high that had been reached before. A stock will usually continue to rise until it hits a price level called “resistance.” This is a temporary “ceiling” for the stock. The more times the stock touches this area and fails to continue up through this level, the stronger this resistance level becomes.

After you discover support and resistance levels for a stock, you can lay the foundation for most of your trades. This is very important. As mentioned above, if these support and resistance levels break, it is likely that the stock has reached an inflection point. If a stock breaks down through its support level, its role reverses and that level will now act as a new resistance level for the stock the next time it starts to make its way higher again.

Conversely, if a stock breaks out above its prior resistance level, that level then becomes support. This new support level will come back into play if that stock starts to decline again. If the stock begins to decline again and the support level is strong, the stock is likely to stop falling at or possibly bounce off of that level.

While it doesn’t take long to learn how to spot support and resistance levels on a stock’s chart, there are many, many, many software programs that will use an algorithm to do it for you. But save yourself some money as most of the major online brokers have resources that tell you the support and resistance levels of individual stocks that should be no charge.

These levels are extremely useful when evaluating a stock, as the way a stock acts around either its support or resistance levels can give us great insight as to which way the stock is likely to move next. If a stock breaks below support, we may recommend a bearish put option call option position. If a stock breaks above resistance, we may recommend a bullish position.

 

3. Moving Averages

Moving averages are technical indicators that can help you identify the “support” and “resistance” levels mentioned above for a stock or index. A moving average (MA) is the average price of a stock over a specified time period. Some of the most common time periods used are 20, 50, 100 and 200 days. Moving averages are used to help spot price trends and are perhaps the most commonly used chart indicator. All good stock charting software includes built-in moving average indicators, and most of the financial sites have them as well.

On the daily, monthly, and yearly charts of the major indexes, you can see the trend of the index along with the 20-day, 50-day, 100-day and 200-day moving averages. These moving averages help me determine if the index (or stock) is above or below support or resistance levels. 

These indicators are so important because each time we see one of these levels being tested and violated, we’re able to evaluate trades so that my profit targets of making a 100% return with options that are sync with the underlying trend of the major indexes. This also goes to show why we often say “Don’t fight the momentum,” as it takes strong support or resistance to stop a market that is already on the move.

 

4. Monday/Friday Closes

We use the Monday and Friday closing prices for each of the major indices as a way of looking at whether money is flowing into or out of the market. You are not likely to hear this in any other financial publication, as it is an exclusive indicator that we have developed over our years trading the market.

In general, Monday/Friday up sessions are bullish and indicate that money is still “flowing” into the market. Negative Monday/Friday closes are bearish and usually mean cash is leaving the market. Mixed Monday/Friday closes can signal a choppy market or a trading range.

A quick glance at these charts is all it takes to see that the Monday/Friday closes are very helpful in predicting possible breakouts or sharp corrections in the market.

While they are not always going to be spot-on accurate — no technical indicators are — the Monday/Friday closes provide a broad overview of the money flow trend either entering or exiting the market and can give us good clues as to when the market may be ready to reverse higher or lower.

 

5. Futures

You can get a brief overview of the futures-trading activity that happens in pre-market trading hours. While futures are not direct indicators of where the market will end up on a given day, they can be used to predict where the major indices may open for trading.

Keep in mind that my goal is not to predict where the market will trade on a given day, but to predict the trends and ride the momentum of the market. If we have a general idea of what direction the market is going to move in, we will be better prepared to capture profits when they are available by using call or put options.

Again, there are hundreds — if not thousands — of indicators that traders can use to help navigate the market. It would be senseless to learn or use them all, but the handful we have reviewed in this report are some of the key ones that we use and talk about most often. 

Because we do all the homework for you at NextOptions.com, you’re never required to put them to work for yourself. However, we’re always interested in teaching those who want to know what’s helped us become a successful trader over the past two decades.

NextOptions.com Index and Earnings Options Play List for 10/13/2017

NextOptions.com Index and Earnings Options Play List for 10/13/2017

Financial Sector Pulls Back on Earnings

8:00am (EST)

The market traded mostly lower throughout Thursday’s session as the start of 3Q earnings season gets underway. The financials were in the spotlight and led the laggards despite upbeat earnings from the sector. The Dow and S&P 500 did show midday strength by setting fresh record highs but closed in the red along with the Nasdaq. The Russell 2000 also finished slightly lower but continues to hold the 1,500 level.

The Dow fell 31 points, or 0.1%, to finish at 22,841. The blue-chips opened lower but traded to an all-time high of 22,884 intraday. Lower resistance at 22,850-23,000 held before the fade to 22,821. Support at 22,600 easily held with risk to 22,400-22,350 on a move below this level.

The S&P 500 slipped 4 points, or 0.2%, to end just under 2,551. The index tested a record high of 2,555 at the start trading with with lower resistance at 2,560-2,575 holding. Support at 2,540 is back on play following the backtest to 2,548 into the closing bell. A close below this level could lead to a retest to 2,525-2,520.

The Nasdaq dropped 12 points, or 0.2%, to close at 6,591. Tech made an intraday run to 6,613 and another record high to keep resistance at 6,650-6,700 in the mix. The opening low of 6,586 held support at 6,575-6,550 holding.

The Russell 2000 gave back nearly 2 points, or 0.1%, to settle at 1,505. The small-caps bottomed at 1,501 at the start of trading with support at 1,500-1,490 holding. There is risk to 1,475-1,470 on a move below the latter. Resistance at 1,515-1,525 held on the brief trip into positive territory to 1,508.

The S&P 500 Volatility Index ($VIX, 9.91, up 0.06) tested a high of 10.33 on the open with lower resistance at 10.50-11.50 holding. Support at 9.75-9.50 was split following the low of 9.65 afterwards.

Exfo (EXFO) reported earnings after Thursday's close

Bank of America (BAC), JB Hunt (JBHT), Wells Fargo (WFC) are announcing numbers this morning.

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Our top triple-digit winning option recommendations for 2017:

+900% Lumber Liquidators August 27.50 calls (August 2017)
+300% JD June 37 calls (May 2017)
+300% Kate Spade March 20 calls (March 2017)
+300% Imax May 30 puts (May 2017)
+286% Fastenal May 49 puts (April 2017)
+246% Dick's Sporting Goods June 45 puts (May 2017)
+244% Starbucks February 57.50 puts (February 2017)
+200% GameStop April 22.50 puts (March 2017)
+173% Alibaba February 100 calls (January 2017)
+169% Amicus Therapeutics August 12 calls (July 2017)
+110% Amicus Therapeutics July 8 calls (June 2017)
+100% Cisco Systems October 32 calls (September 2017)
+100% Bank of America July 23 calls (June 2017)
+100% PowerShares QQQ ETF February 122 calls (January 2017)
+100% Array BioPharma January 8 calls (January 2017)

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Test

Ambarella (AMBA) Earnings on Deck

12:05pm (EST)

With second-quarter earnings season just a month away, earnings have been on the back-burner as Wall Street focuses on economic and geopolitical news in the meantime. Companies with different fiscal years fill the void during off months following the the rush at the start of the quarterly earnings announcements.

Ambarella (AMBA) will confess first-quarter results after today's closing bell with Wall Street looking for a profit of $0.36 a share on revenue of $63.5 million. The company has smashed estimates the past four quarters by 18, 17, 16, and 6 cents, respectively. The high estimate for the recently ended quarter has the company earning 41 cents a share.

Despite the impressive earnings beats, shares have struggled afterwards falling the past three earnings announcements. The pullbacks have been 4%, 11%, and nearly 7%. In the year ago period, shares rallied 9%.

Last week's sudden pullback from the $65 level to double-nickels ($55) came on drone launch concerns as the company's largest customer, DJI, may have dual-sourced video processing chips. DJI's Spark drone went on the market with a price tag of $499 and this concern could become a material headwind, if true.

Shares held the 100-day moving average on the punishment and are trying to hold shaky support at $59 and the 200-day moving average heading into the announcement. The 50-day moving average was in a solid uptrend but leveled off following the technical damage.

The recent action has juiced the option premiums in AMBA with weekly and monthly strikes available to trade. The regular AMBA June 60 calls (AMBA170616C00060000, $2.40, up $0.20) and the AMBA June 60 puts (AMBA170616P, $3.05, down $0.15) are pricing in a possible 8%-10% move in the stock during after-hours and into tomorrow's open.

I don't actively follow AMBA and I'm not sure if the recent volatility is an overreaction, or represents a buying opportunity ahead of earnings.

If shares were to make a run to $65 this week, the aforementioned call options would double from current levels as they would be $5 "in-the-money". If shares stay below $60 and falter on the news, the call options would expire worthless. If shares fell below $53.90, technically, by next Friday, the aforementioned put options would double from current levels.

I don't usually trade options that are priced over $2, especially with earnings trades, so I will be sitting on the sidelines watching the action. Other stocks in the chip sector could react in a positive or negative way based on AMBA's numbers and I'm looking to the possible upside in other names.

Today's action has been more of the same as yesterday with tight action to the downside. The market seems content to wait for the Thursday's fireworks showcasing a former head of the FBI's comments following his firing from a month ago and the outcome from the overseas election.

The Dow is down 5 points to 21,178 while the S&P 500 is off 2 points to 2,434. The Nasdaq is slipping a point to 6,294 and the Russell 2000 is declining 6 points to 1,390.

I have updated our current trades so let's go check the tape.

4Q Earnings Heat Up

4Q Earnings Season Heats Up

8:00am (EST)

The bears opened the shortened weak with a win as the recent bullish Tuesday's were outweighed by a shaky dollar. News that then President Elect, Donald Trump, said in an interview with the Wall Street Journal the US dollar was "too strong" led to some uneasiness and overall market weakness.

The rest of the week was shaky as December lows came into play but Friday's action kept the bottom of the trading ranges intact. With fourth-quarter earnings season coming into full swing, the bulls will need to show continued strength while trying to regain momentum for another possible run at all-time highs.

The Dow jumped 94 points, or 0.5%, to finish at 19,827 on Friday. The blue-chips held positive territory throughout the session with the high reaching 19,843. Resistance at 19,900-20,000 held tight with a close into this level a bullish start for the week. A move above the latter gets 20,200-20,350 in play. Support is at 19,800-19,725 with a move below 19,700 likely leading to 19,600-19,500 and the 50-day moving average. For the week, the index fell 58 points but is still up 65 points for the year.

The S&P 500 climbed 7 points, or 0.3%, to settle at 2,271. The index made a run to 2,276 shortly after the opening bell to clear lower resistance at 2,275-2,300. Although this level failed to hold, the close above 2,270 was semi-bullish. Support is at 2,260-2,250. A move below the latter could lead to a continued backtest to 2,240-2,235 and the 50-day moving average. The S&P 500 fell 3 points for the week, and is 33 points, year-to-date.

The Nasdaq added 15 points, or 0.3%, to close at 5,555. Tech raced to a high of 5,574 on the open with lower resistance at 5,575-5,600 holding by a point. Support remains at 5,525-5,500 with last week's lows reaching 5,527 on Tuesday and 5,528. If these levels hold throughout the week, we can say it was a "double bottom". However, a breech of either aforementioned numbers would be a bearish development. The Nasdaq fell 19 points last week and for 2017, is showing a 172-point gain.

The Russell 2000 popped a 6-pack, or 0.5%, to end at 1,351. The small-caps traded up to 1,355 midday but failed fresh resistance at 1,360-1,365. The lower highs and lower lows throughout last week pushed lower support at 1,345-1,340 and the 50-day moving average. There is additional risk to 1,325-1,320 if this level fails to hold over the near-term. Last week's 21-point dip led the overall market pullback with the index now showing a 6-point loss for the year.

The S&P 500 Volatility Index ($VIX, 11.54, down 1.24) stayed deflated throughout Friday's session with the low tapping 11.53. The 10% pullback and close just outside of support at 11.50-11 looked bullish. The 52-week low is at 10.93 with 10 and single-digits looking possible on a move below 10.75. Resistance is at 12.50-13.50 and the 50/100-day moving averages with continued closes above the latter leading to 14.50-15 and a breech of the 200-day moving average.

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How to Trade E*Trade’s Earnings

A sneaky play without taking the direct hit of an earnings announcement might be a bullish trade on E*Trade Financial (ETFC, $36.93, up $0.21). Shares have been in a strong, tight range for two weeks but have been setting higher highs and fresh 52-week peaks since mid-November.

Analysts are expecting a profit of $0.42 a share on revenue just shy of $502 million. The high estimate is pegged at $0.45 a share with the low at $0.39. The high revenue estimate is north of $517 million while the lowball is at $459 million. The company has topped estimates by 12 cents and 10 cents, twice, over the past three quarters.

The ETFC February 38 calls (ETFC170217C00038000, $0.95, up $0.15) look attractive at current levels and would give the trade a month to play out. If ETFC shares can clear $40 by mid-February, these options would easily double from current levels. Of course, an earnings miss, or lowered guidance, could cause a pullback in the stock.